VMware 2012 Annual Report Download - page 94

Table of Contents VMware, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
VMware recognizes interest expense and penalties related to income tax matters in the income tax provision. VMware had accrued $6.0
million of interest as of January 1, 2012 and $8.1 million of interest as of December 31, 2012 associated with unrecognized tax benefits. These
amounts are included as components of the $151.5 million unrecognized tax benefits, net of federal tax benefits, at December 31, 2012 and
$86.6 million unrecognized tax benefits, net of federal tax benefits, at December 31, 2011 . Income tax expense for the year ended
December 31,
2012 included interest of $2.1 million associated with uncertain tax positions.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits, excluding interest associated with unrecognized tax
benefits, is as follows (table in thousands):
Due to the increased complexity in international operations, including judgments in determining the appropriate tax jurisdictions for revenue
and expense items, the Company’s unrecognized tax benefits will likely increase in 2013 . However, the Company cannot reasonably estimate
the increase.
VMware is subject to U.S. federal income tax and various state, local and international income taxes in numerous jurisdictions. VMware's
domestic and international tax liabilities are subject to the allocation of revenues and expenses in different jurisdictions and the timing of
recognizing revenues and expenses. Additionally, the amount of income taxes paid is subject to VMware's interpretation of applicable tax laws
in the jurisdictions in which it files.
The U.S. federal income tax audit of the EMC consolidated group for 2009 and 2010 commenced in 2012 . VMware has income tax audits
in progress in numerous state, local and international jurisdictions in which it operates. In the VMware international jurisdictions, which
comprise a significant portion of its operations, the years that may be examined vary, with the earliest year being 2007
. Based on the outcome of
examinations of VMware, the result of the expiration of statutes of limitations for specific jurisdictions or the result of ruling requests from
taxing authorities, it is reasonably possible that the related unrecognized tax benefits could change from those recorded in the statement of
financial position. It is possible that one or more of these audits may be finalized within the next twelve months. However, based on the status of
examinations, and the protocol of finalizing audits, it is not possible to estimate the impact of such changes, if any, to the previously recorded
uncertain tax positions.
L. Commitments and Contingencies
Litigation
From time to time, VMware is subject to legal, administrative and regulatory proceedings, claims, demands and investigations in the
ordinary course of business, including claims with respect to commercial, product liability, intellectual property, employment, class action,
whistleblower and other matters. From time to time, VMware also receives inquiries from government entities regarding the compliance of our
contracting and sales practices with applicable regulations. VMware accrues for a liability when it is both probable that a liability has been
incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of probability and
the determination as to whether a loss is reasonably estimable. These accruals are reviewed at least quarterly and adjusted to reflect the impacts
of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. As of
December 31, 2012 and 2011 , the amounts accrued were not material. To the extent there is a reasonable possibility that the
88
For the Year Ended December 31,
2012
2011 2010
Balance, beginning of the year
$
94,692
$
109,294
$
84,970
Tax positions related to current year:
Additions
12,462
19,323
27,777
Reductions
(3,529
)
(1,788
)
—
Tax positions related to prior years:
Additions related to acquisitions completed in 2012
60,410
—
—
Additions
19
3,409
7,339
Reductions
(815
)
(9,281
)
(9,563
)
Settlements
(335
)
(23,394
)
—
Reductions resulting from a lapse of the statute of limitations
(4,375
)
(2,416
)
(904
)
Foreign currency effects
(761
)
(455
)
(325
)
Balance, end of the year
$
157,768
$
94,692
$
109,294